Q&A: Too many credit cards? Protect your credit scores while closing accounts

Dear Liz: Over the years, my husband and I have accumulated a number of credit cards. All have had a zero balance for years. I want to start canceling these cards, but I’m concerned that will hurt our great credit scores. How should I go about this, or should I?

Answer: As you probably know, closing credit accounts won’t help your scores and may hurt them. That doesn’t mean you can never close a credit card, but you shouldn’t close a bunch of them at once or close any if you’ll be in the market for a major loan, such as a mortgage or auto loan.

If you’re not planning to borrow money in the near future, then you can start closing accounts one at a time. You’ll probably want to keep the cards with the highest credit limits, and perhaps your oldest card as well. Monitor your scores to see how long they take to recover from each closure. You may need to wait a few months before shutting the next account.

Be sure to use your remaining cards occasionally by charging small amounts and paying the balance in full. That will keep the cards active and help prevent the issuer from canceling them.

Q&A: Be strategic when closing credit accounts

Dear Liz: I recently moved to a new state and would like to open a credit card at my new credit union. I’m concerned that closing my old credit union account and card will hurt my credit scores, which are over 800. The old card, which I no longer use, has a high credit limit. My income is also lower, so I’m not sure how that will affect the credit limit I get.

Answer: Closing credit accounts can ding your credit scores, but that doesn’t mean you should never close an unwanted account. You just need to do so strategically.

First, understand that the more credit accounts you have, the less impact opening or closing an account typically has on your scores. If you have a dozen credit cards, for example, closing one will likely have less impact than if you only have two.

Still, you’d be wise to open the new account before closing the old one. That’s because closing an account lowers the amount of available credit you have, and that has a large impact on your scores.

If the new issuer doesn’t give you a credit limit close to that of the old card, you’re still probably fine closing the old account if you have a bunch of other cards. If you don’t, though, you may want to hold on to the old account to protect your scores.

Q&A: This is why credit scores are so confusing

Dear Liz: I am from Germany. I have had a bank account in America for over one year. Now I get my FICO score. After six months it was 738, half a year later, it was 771 and one month after that, 759. Why does it change in such a short time? Is it the real FICO score?

Answer: Welcome to the U.S. and its sometimes-baffling credit scoring systems. Even people who were born here often misunderstand how credit scores work.

You don’t have just one score; you have many, and they change all the time to reflect the changing information in your credit reports. Higher or lower balances on a credit card, a new credit application or the simple passage of time can make the numbers change.

The FICO scoring system is the most dominant, but lenders also use VantageScore, a FICO rival created by the three credit bureaus (Equifax, Experian and TransUnion), plus proprietary scores.

You also will see different numbers depending on which credit bureau report is used to create the score and which version of the score is used. Credit scoring formulas may be designed for certain industries and formulas are updated over time.

So your FICO Auto Score 6 from Experian likely won’t be the same as your FICO 4 from TransUnion, your FICO Bankcard Score 4 from Equifax or your VantageScore 3 from any of the bureaus, even if you get all the scores on the same day.

It can be hard to predict which score a lender will use, but the same behaviors tend to be rewarded by all of them. Those behaviors include paying bills on time, using only a small portion of your available credit, having different types of credit (installment loans and revolving accounts, such as credit cards) and applying for new credit sparingly.

If you’re using a score to monitor your credit, it’s important to use the same kind from the same bureau — otherwise you’re comparing apples and oranges, as we say in English.

Q&A: How asking for a credit limit increase can help your credit score

Dear Liz: Does requesting a credit limit increase on a credit card affect your credit score in any way?

Answer: Such a request can result in a hard inquiry on your credit reports, which can slightly ding your scores. If you get the increase, though, that usually has a positive effect on your scores.

Credit scoring formulas, including those developed by FICO and VantageScore, are sensitive to how much of your available credit you’re using. That’s especially true on revolving accounts, such as credit cards. The less of your available credit you use, the better: 30% or less is good, 20% or less is better, 10% or less is best.

It’s important to keep your balances low relative to your limits even if you pay those balances in full every month (as you should). The balances that are reported to the credit bureaus, and used in calculating your scores, are typically your statement balances. If those amounts are high relative to your credit limits, your scores probably will suffer, even if you pay that balance off immediately.

People keep their credit utilization low in a number of ways. They can spread their purchases across a number of cards, make more than one payment every month (typically one right before the statement closing date, and another before the due date) or ask for credit limit increases. Any of those actions can help increase the gap between the credit they’re using and their available credit, which can help their scores.

Q&A: Adding a child as a credit card user

Dear Liz: I’ve read that adding a child as an authorized user on your credit card could help build his or her credit history. But I was specifically told that this was not the case, as the child’s Social Security number was not primary.

Answer: Whoever told you may not have understood how authorized user activity typically is reported, or may have been talking about a specific issuer’s policy.

Adding someone as an authorized user to a credit card typically results in the history for that card being added to the authorized user’s credit report. That in turn can help the authorized user build credit history and improve his or her credit scores.

Some smaller issuers, such as credit unions or regional banks, may not report authorized user activity to the three credit bureaus, but all of the major credit card companies do. Some of these big issuers, however, don’t report the information if the authorized user is younger than a certain age or if the information is negative. The age cutoff varies by issuer. For American Express and Wells Fargo, for example, it’s 18; for Barclays, it’s 16 and for Discover, it’s 15. Other major issuers don’t have an age cutoff. American Express and U.S. Bank also won’t report to the authorized user’s credit file if the account is delinquent.

The credit bureaus, in turn, have their own policies. TransUnion includes whatever the issuers report. Equifax adds the information to the credit report if the authorized user is at least 16. Experian adds the information supplied by the issuers, regardless of age, but will remove it if the original account becomes “derogatory” — which typically means payments are skipped or the account is charged off.

If you want to help a child build credit by adding the child as an authorized user, you’ll want to make sure you’re adding him or her to a card that will actually do some good. A quick call to the issuer can help you find out its policy on reporting authorized user activity.

Q&A: Limiting your rate shopping window

Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Q&A: How to boost your credit score before you buy a house

Dear Liz: I am trying to purchase my first home. I have a 20% down payment for the price range that I am looking for. The issue I am running into is that I have relatively new credit and my credit score is not great at all. I had to go to the emergency room two years back with no insurance and have medical expenses that went into collections. I am now in a financial spot to pay them off. These are the only negatives on my credit report that are unresolved. Will paying these off get my credit to the point that I can buy a home? I am lost as to how to get my score where it needs to be.

Answer: Unfortunately, paying collection accounts typically doesn’t help your credit scores, especially the scores used by most mortgage lenders.

Since you’re new to credit, you may not realize that you don’t have just one credit score. You have many. The two major types are FICO and VantageScore. The latest versions of each (FICO 9 and VantageScore 3.0 and 4.0), ignore paid collections. In addition, FICO 9 and VantageScore 4.0 count unpaid medical collections less heavily against you than other unpaid debts.

But mortgage lenders typically use much older versions of the FICO score, which count all collections against you even if they’re paid.

That said, it would be tough to get a mortgage with unpaid collections on your credit report. Since you have the cash, you may be able to negotiate discounts so that you can resolve these debts at a somewhat lower cost. (Collectors typically would much rather get a lump-sum settlement than wait to be paid over time.)

You’ll also want to get some positive information reported to the credit bureaus to help offset the negative information. The fastest way to do that would be to persuade someone you know who has good credit to add you as an authorized user to one of his or her credit cards. This person doesn’t have to give you the card or any access to the account. Typically, the account history will be “imported” to your credit reports, which can help your scores as long as the person continues to use the card responsibly.

Another way to add positive information is with a credit-builder loan, offered by many credit unions and Self Lender, an online loan site. Usually, credit-builder loans put the money you borrow into a savings account or certificate of deposit that you can claim after you’ve made 12 on-time payments. This helps you build savings at the same time you’re building your credit.

Secured credit cards also can help. With a secured card, you make a deposit with the issuing bank of $200 or more. You get a credit limit that’s typically equal to that deposit. Making small charges on the account and paying it off in full every month can help you build credit without paying interest. You’ll want a card that reports to all three credit bureaus, because mortgage lenders typically pull FICO scores from all three bureaus and use the middle of the three scores to determine your rate and terms.

Q&A: Take a look behind the credit-score numbers game

Dear Liz: I recently got an email from my credit card issuer stating my credit score had just dropped 21 points. Having a good credit score and not aware of any recent adverse actions, my first reaction was alarm.

Checking with the issuer online, I saw only advertisements for “protect your credit” services, so I phoned. I was informed the numbers came from Equifax credit bureau. I contacted Equifax as well as TransUnion and Experian, which resulted only in more offers of products to protect my credit. I downloaded my free credit reports from AnnualCreditReport.com and found nothing suspicious. I was finally directed to FICO, but an email sent more than a month ago remains unanswered.

Is it legal for these companies to market their products through presumably fictitious or even fraudulent means? What is the best way to find out my true credit score? Can my credit score suffer because I ask these questions in a public forum?

Answer: Knowing a little more about how credit scoring works may put your mind at ease.

There is no one “true” credit score. Lenders and other companies use many different kinds. FICO is the leading credit scoring company and the FICO 8 is the most commonly used score, but many companies use older versions or ones modified for their specific industry (such as the FICO Auto Score 5, for example). Plus, your FICO 8 from Experian may be different from your FICO 8 from TransUnion or Equifax because the scores are based on the information in your credit bureau files and the bureaus are separate, competing businesses that don’t always have the same information.

Then there’s the VantageScore, a rival to the FICO, which is used by some lenders and by many sites that offer people their credit scores for free. The VantageScore formula is different from the FICO formula, so your numbers could be different as well.

All these credit scores, however, are created solely using the information in your credit reports. Your income, gender, address, political opinions, computer operating system and online comments are not included in credit score calculations.

Some people are understandably confused about that. Various start-ups and researchers have suggested that non-credit information — such as information gleaned from someone’s social media postings or online surveys — could replace credit information in loan decisions. But the U.S. has fair credit reporting laws that probably would make such alternatives unworkable. (It would be nice if start-ups checked to see what regulations apply to their industry before sending out press releases, but that doesn’t always happen.)

Given that you didn’t see anything obviously wrong on your credit reports, you don’t need to worry too much. The credit score drop you describe might be because you charged more on a credit card than usual, had a credit limit lowered or applied for a bunch of credit in a short period of time. It probably will reverse itself over time.

Alerting you to credit score changes isn’t an illegal practice, even if the company’s primary purpose in keeping you up to date is to market credit-monitoring services to you. (Credit protection is a misnomer because these services can’t prevent identity theft. They can only alert you if it’s already happened.)

You did exactly what you should have done when you were alerted to the point drop — you went to AnnualCreditReport.com and checked your credit reports. If you want to put your mind further at ease, consider freezing your credit, a process that could prevent identity thieves from opening new accounts in your name.

Q&A: Don’t value credit rewards over scores

Dear Liz: You’ve advised people that “it’s important to keep your credit utilization down, even if you pay in full (as you should).” That may be good advice regarding one’s credit score, but there is another perspective. Although we pay in full every month (and have paid no credit card interest since 1971), charging almost every purchase or expense has earned us three pairs of round-trip frequent flier miles tickets to Paris — one pair first class and the other two business class — in the last 15 years.

Answer: Maximizing rewards shouldn’t come at the cost of your credit scores, particularly if you want to qualify for future cards that offer tempting sign-up bonuses. You can continue to charge away, as long as you either spread the charges across several cards or make two or three payments every month on each card you use to keep the balances from getting too high.

Q&A: One auto-pay misstep and her credit score falls off a cliff

Dear Liz: I recently took a deduction in my Experian FICO score of more than 100 points due to a single late payment to my mortgage. My score of 810 dropped to 704.

The mortgage company notified me several months ago that my impound account would go up $51 a month due to higher homeowners insurance premiums. I believed my auto-pay would adjust automatically as it used to, but that didn’t happen. About 10 days after it was “past due,” I received a letter saying I owed the $51 plus a $53 late fee. I promptly sent the money and asked that the late payment be deleted from my credit reports. The mortgage company refused, saying they would not and could not because of federal regulations.

I am about to get a mortgage loan to buy my daughter’s house, but now the rate will be at least 1 percentage point higher. Why would FICO scores drop over 100 points on one late payment? Anything I can do about this? How long will it be before my FICO scores are above at least 750 if there are no more late payments and my credit utilization stays below 10%?

Answer: “Federal regulations” can be a convenient punching bag for financial services companies, but they don’t prevent a lender or mortgage servicing company from deleting a late-payment notification for a good customer. The company should own up to the fact that this is its policy, not something imposed by the feds.

Your experience does show the potential downside of automatic payments and of impound accounts. (For those who don’t have impound accounts: They’re an arrangement by which the mortgage company collects payments for insurance and property taxes.) They can be enormously helpful when everything goes right, but they’re not “set it and forget it.”

Ideally, you would have made a note on your calendar to check that the larger payment was made on time and been able to quickly correct the error. There’s not much you can do now except ensure that all your bills are paid in full and on time from now on. It may take up to three years of stellar credit-handling behavior for your scores to break 800 again. Credit scores are like mountains — you can fall pretty quickly, but it takes a long time to regain lost ground.

The scores are extremely sensitive to late payments because that’s often the first sign of financial troubles that will end up in defaults, collections and bankruptcy. Credit reports and credit scores make no distinction between a late payment caused by human error versus one caused by lack of funds.